Negotiators on a federal rule-making panel have agreed on a plan to expand and remake Pay as You Earn, the most generous of the student-loan income-based repayment plans.
The revised program — dubbed REPAYE, short for Revised PAYE — would be at once more inclusive and more targeted than the current plan. It would be open to everyone, regardless of income, but it would focus its benefits on undergraduate students and lower-income borrowers. It would also provide a softer landing for borrowers who fell out of the plan by accident.
Under the new plan, higher-income borrowers would pay a larger share of their income each month. Students who borrowed for graduate school would pay for an additional five years before their loans were forgiven, and married borrowers would, with some exceptions, be required to make payments based on their joint income and debt.
Struggling borrowers, meanwhile, would have more of their debt forgiven. Under the new plan, borrowers whose monthly payments did not cover the interest on their debt would have only half, at most, of the unpaid interest added to their loan balance each month.
Taken together, the changes would respond to concerns about the costs and complexity of the existing PAYE program, which was created in 2010. They would also reflect two worries about the original plan — that it is making graduate students less sensitive to the cost of their programs, and that it allows graduate schools to raise tuition on the taxpayers’ dime.
According to President Obama’s most recent budget, income-driven repayment plans will cost taxpayers $20 billion more than the administration originally expected.
Meanwhile, thousands of struggling borrowers are falling out of income-driven student-loan repayment plans because they’re not filing documents to certify their annual income on time. During a recent one-year period, almost 700,000 borrowers who had enrolled in income-based plans — 57 percent of the total — failed to certify their income by the deadline.
PAYE vs. REPAYE
The existing Pay as You Earn program caps borrowers’ monthly payments at 10 percent of their discretionary income — or the amount they would pay under a 10-year standard repayment plan, if that is lower — and forgives any remaining debt after 20 years. (Married borrowers who file taxes separately from their spouses can make monthly payments based only on their income, even if their spouse earns significantly more.)
The program is available only to borrowers with new loans. But last June President Obama directed the Education Department to make the program available to borrowers with older loans. He also called for changes in the program that would focus its benefits on the neediest borrowers.
Under the plan that the rule-making panel agreed to on Thursday, borrowers would pay 10 percent of their discretionary income each month, even if that amount was greater than what they would pay under a standard 10-year term. Graduate students — who tend to have higher incomes and larger debt burdens — would have to repay their loans for 25 years before receiving loan forgiveness.
Married borrowers would no longer be able to lower their payments by excluding their spouse’s income, although separated borrowers and victims of domestic violence would still be able to pay based on their income alone.
The new program would still require students to certify their income each year. But it would reduce the penalty for some students who missed the deadline.
Under PAYE, borrowers who fail to certify on time see their payments increased to the amount they would pay under a standard repayment plan. Under REPAYE, they would be placed into an “alternative payment plan,” with their payments based on the amount it would take to pay off the loan in 10 years or by the end of the 20- or 25-year repayment term, whichever is sooner. That means most borrowers’ payments would not spike as much if they missed the deadline — though some would pay even more.
It’s unclear why so many borrowers are missing the certification deadline, though some consumer advocates say the renewal reminders sent by some loan servicers are too generic, and too easy to overlook. While the new rules would not deal with that concern, the department is preparing a pilot program to test new ways of communicating with borrowers.
Negotiations over REPAYE and a handful of other issues began in February. Thursday’s agreement on all the issues means that the Education Department is bound by the negotiators’ plan. If the panel had failed to reach consensus, the department would have been allowed to release any regulations it wanted, without regard to any compromises reached during rule making.
Draft rules are due out in July, with the final package expected in November.
Kelly Field is a senior reporter covering federal higher-education policy. Contact her at kelly.field@chronicle.com. Or follow her on Twitter @kfieldCHE.
